Business finance options

Business contract hire (BCH)

Business contract hire (also known as business leasing) arrangements are not only tax efficient, they are also one of the most cost-effective and simplest ways to add vehicles to a fleet without having a significant impact on finances.

How business contract hire works

A monthly rental to lease the selected vehicle is paid over a set period of time, typically between 12 and 60 months, with a flexible initial payment of either 1, 3, 6, 9 or 12 months to be paid after delivery. The vehicle is then returned at the end of the term. Annual mileage requirements, servicing and maintenance options can all be customised and if necessary included within the fixed monthly payment.

Why choose business contract hire?

Limited capital investment required

Business contract hire is usually a cheaper option than actually purchasing a brand-new vehicle

Rental costs will be off-balance sheet, which has the added benefit of freeing up your credit lines

Avoid the risk of losing money through depreciation of the vehicle

No need to sell the vehicle at the end of the agreement, as it will be collected and returned

This type of arrangement is a good option for businesses that have commercial vehicles as 100% of the VAT on the finance and servicing costs can be reclaimed

If the vehicle has some degree of personal use, it will still be possible to reclaim 50% of the VAT. This is therefore ideal for company cars

Take advantage of maintenance, servicing and MOT costs being included as part of the agreement

Further considerations

Depending on the remaining contract term and mileage used, ending the contract early can be expensive

You must look after the vehicle and return it in a well-maintained condition otherwise you will be charged for any damage over and above that stated in the BVRLA 'Fair Wear and Tear’ Guide. If you exceed the agreed mileage, you will be charged excess mileage for each mile over that stated in your contract

You will never own the vehicle as there is no option to buy it at the end of the contract

Business contract purchase (BCP)

Who says you can't have the best of both worlds? Business contract purchase allows you to enjoy the risk-free element of contract hire, whilst having the option to purchase the vehicle at the end of the contract term. That allows you to enjoy low monthly payments, coupled with the freedom to wait until the very end of the contract to decide whether you want to purchase the vehicle at a guaranteed price agreed at the beginning of the term. This is especially useful for luxury vehicles that are likely to retain their value.

How business contract purchase works

We will work out a fixed monthly payment plan for you, and estimate the vehicle's likely value at the end of the contract. You can start using the vehicle immediately, making the monthly payments and effectively leasing it. As the end of your term nears, you will have a choice of options. You can either choose to hand the vehicle back to us, walking away from the deal completely, or you can simply pay the previously agreed figure to assume full ownership. Alternatively, you can refinance the final balloon payment, in order to spread the cost of buying the vehicle.

Why choose business contract purchase?

You’ve got complete control to choose whether to hand the vehicle back, or purchase it for an agreed amount

Having a guaranteed purchase price at the end of the contract - and the monthly payments - means budgeting is a simple process

Your monthly payments are only designed to cover the drop-in value between the initial price and the car's market value at the end of the term, meaning low monthly payments are possible

Further considerations

You will have to make a decision at the end of the contract as to whether you wish to sell the vehicle, keep it or return it

The monthly payments tend to be higher than on a business contract hire

Sometimes the interest rate is marginally higher than a hire purchase

The whole cost of the vehicle is shown on your credit file. If you damage the vehicle, you may incur a charge (any damage not covered in the BVRLA ‘fair wear and tear’ guide)

If you exceed the agreed mileage you will incur an extra charge

The monthly cost doesn’t include vehicle tax

Business hire purchase (BHP)

A hire purchase plan is a very popular and flexible way for businesses to acquire the vehicle they want immediately and to take ownership of it once the value has been fully repaid.

How business hire purchase works

Hire purchase is a very simple finance option. A deposit payment is agreed - typically a multiple of the monthly payment - and repayments will be calculated based on this figure, the value of the vehicle, and the length of the repayment term. Once all the repayments have been completed, the business will become the legal owner of the vehicle. In some cases, the contract allows a proportion of the cost to be deferred to the end of the term and a final balloon payment is then made.

Why choose business hire purchase?

You will own the vehicle once the repayments have been completed

With this type of agreement, there’s far less risk for the lender so some very attractive interest rates can be offered. And if a larger deposit is put down, then the interest rate can be further lowered

The credit rating of the hirer is not necessarily an issue

You get immediate access to your vehicle without having to make a large capital outlay upfront

There’s no excess mileage charges or damage restrictions

Hire purchase can be very tax efficient, as vehicles acquired through hire purchase agreements are classified as fixed assets. This allows a percentage of the purchase price (depending on the CO2 emissions) to be written down each year

VAT paid on vans will usually be required upfront as a deposit, but can be reclaimed in full during the tax return process

Further considerations

The loan is secured against the vehicle: The vehicle can be repossessed if payments are not kept up

If you miss payments, this can negatively affect your business

The finance company are the legal owners of the vehicle until the agreement is paid in full

Repayments will include interest charges, and the car will cost more overall than a cash purchase

The rate of interest you pay will reflect the level of risk to the lender. Previous poor credit will represent higher risk and a higher rate may be charged

Business lease purchase (BLP)

A lease purchase is a popular option for a company that prefers to own its vehicles but likes to spread the payment for them over a fixed length of time. This option is similar to PCP, the difference being that an agreement to purchase the vehicle at the end of the term is made in advance, with no option for the purchaser to change their mind at the conclusion of the term.

How business lease purchase works

A fixed monthly lease fee and a final balloon payment will be set and agreed at the outset. The balloon payment is based on the vehicle's estimated future value (residual value).

When the end of the term arrives the final balloon payment can be made, then ownership of the car will transfer. Or it can be requested that we sell the vehicle on to cover the outstanding value. If the vehicle’s sale exceeds the final balloon payment, 98% of the profits from the sale will be received by the lease holder. Conversely, if the sale value is less than the outstanding amount to pay, you would have to pay the difference.

This option often works out best with luxury cars, which tend to retain their residual value extremely well. As the business will be taking on the vehicle as an asset, it will want it to retain as much of its original value as possible in order to benefit.

Why choose a lease purchase?

Immediate access to the vehicle without having to make a large capital outlay

The set monthly payment figure will aid budgetary control and financial planning

The agreement to purchase the vehicle at the end of the term means that lower monthly fees can be offered, as the sale is guaranteed

No mileage limits

Monthly payments will not be affected by VAT, so this option can be perfect for non-VAT registered companies who want to own the vehicle at the end of the term

The vehicles can be listed as company assets on the balance sheets

Further considerations

The balloon payment must be paid for at the end of the contract

The risk of the vehicle depreciating is yours

In some cases, the balloon payment can be higher than the residual value which means you’ll need to pay the difference

Dedicated funding product, which does not include maintenance or any other value-added services

Business finance lease (BFL)

A business finance lease is a practical and appealing way to gain instant access to a vehicle at an affordable monthly cost. There’s no capital outlay and vehicles purchased in this way will not show up on a balance sheet as assets. At the end of the agreement, any outstanding value can be met by selling the vehicle to a third party.

How a business finance lease works

Essentially, the business rents the vehicle from the finance company for an agreed period. The finance company has ownership of the vehicle but the business (lessee) has exclusive use of the vehicle. The payments made in the contract term are calculated to cover the total cost of the vehicle. Sometimes the lessee pays a balloon payment at the end of the contract by which point the finance company will have recovered their total investment.

At the end of the lease, there are three options:

The lessee can sell the vehicle to a third party. If the sale proceeds exceed the rent the business has paid for the vehicle the lessee could get a rebate or;

The vehicle can be returned to the finance company to be sold or

The customer enters into a secondary lease period. The secondary rental cost may be much lower than the rental cost of the initial lease (this is known as a peppercorn rental) or the lease could continue on a month by month at the same rental cost as the first contract

Why choose a business finance lease?

Contract terms of minimum 24 months - maximum 60 months

Fixed monthly rentals

VAT reclaim of 100% for business only, or 50% on the VAT paid on the monthly payment if using for personal use as well

This type of arrangement makes cash flow management simple as monthly costs are fixed at the beginning of the agreement

Costs will also be offset against income rather than being a capital expenditure

Further considerations

You will never own the vehicle at the end of the contract

The vehicle can be repossessed if you don’t keep up payments

Maintenance options are typically only available with selected funders

Have more questions?

Then give us a call to discuss, we're here to help:

0113 387 4240

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